Zendesk, Inc.
Q4 2020 Earnings Call Transcript

Published: 4 Feb 2021

[Marc Cabi:]

Welcome to our Fourth Quarter of 2020 Earnings Call. We're pleased to report our results. Joining me on the call today are Mikkel Svane, our Founder, CEO and Chair of the Board as well as Elena Gomez, our Chief Financial Officer. During the course of today’s call, we may make forward-looking statements such as statements regarding our future financial performance, product development, growth prospects, ability to attract and retain customers and our ability to compete effectively.

[Mikkel Svane:]

Thank you. Thanks so much, Marc. I hope everybody can see me and hear me. Good afternoon, everyone. So I'm of course proud to announce that in 2020, we surpassed our $1 billion annual revenue target which was originally a target we shared back in February of 2016 so we’re very proud about that. We achieved this milestone during a year of unprecedented turbulence that has caused so much pain for so many people around the world. Yet over and over again, our customers have inspired us with their solidarity, with the grit, and with the perseverance they have shown throughout the year. So of course, big thank you to all our customers for trusting us as their partner, thank you to that truck passing by. And we will of course, do anything we can to continue to be your trusted partners and be your champions of great customer service. In the fourth quarter, we observed really robust demand for our solutions from both new and existing customers, and we are entering 2021 with strong momentum and believe that many of the changes brought to us by this pandemic are doable and will accelerate the shift to online first-business models, also of course, in your customer relationships.

[Elena Gomez:]

Thank, God.

[Mikkel Svane:]

And I know that many here on the call have gotten to know Elena really well over those five years. Elena is of course an incredibly generous, genuine human being. And we appreciate especially how gracefully she has decided to transition from Zendesk staying at least through our next earnings cycle. So, that will be plenty of time for proper sendoff for Elena. This is not the time today to say goodbye. I will add an upcoming occasion make you cry Elena for everything and thank you for everything that you've done for this company. But for now I'm going to ask you to take us through the financial results.

[Elena Gomez:]

Awesome, thanks for not making me cry and appreciate the kind words. So, I'd like to start off by thanking all of our 4,000 employees all around the world for their resilience and execution through an unprecedented year. We close out the year with momentum and I'm proud of achieving our $1 billion annual revenue milestone in the fourth quarter. For the full year 2020, we delivered $1.3 billion or $1.03 billion of revenue which reflects 26%. I kind of getting ahead of myself there which reflects 26% year-over-year growth. We also delivered full year non-GAAP operating margin improvement of 3.7 percentage points year-over-year. Fourth quarter revenue increased 23% year-over-year exceeding our expectations entering the quarter and certainly our expectations at the onset of COVID. Revenue outperformance was driven by strong demand for our solutions from both new and existing customers. We are particularly pleased with the strength in our new business bookings, the strongest growth in three years. GAAP gross margin for the fourth quarter was 76.3%, up 3 percentage points - 3.2 percentage points year-over-year. Non-GAAP gross margin was 79.4%, up 2.7 points year-over-year. Gross margin improvement was driven largely by revenue scale and increased optimization of our personnel costs in our product support organization and efficiency from our hosting infrastructure. GAAP operating margin declined by 5.2 percentage points year-over-year, primarily due to a $15 million impairment related to office space consolidation.

[A - Marc Cabi:]

Thanks, Elena. We're going to open it up for Q&A as we've done the last three quarters. We have put all of our analysts to a randomizer. And today, we'll open up the call with Phil Winslow with the first question.

[Phil Winslow:]

Thanks for taking my question and I wish I had one mega millions but I'll take - oh, there we go unmuted now.

[Marc Cabi:]

Okay.

[Phil Winslow:]

Questions are to Mikkel and then off to Elena. Mikkel when you think about the $3 billion target - sorry the tripling target that you talked about over the next five years? How do you think about the growth algorithm there? How much comes from moving up market the new Zendesk suite Sunshine et cetera then just a follow-up for Elena on that?

[Mikkel Svane:]

Yes so, we've of course been analyzing all the different growth dimensions to our business. And I'm not going to - share details about that model. But we believe that we both have like additional geographic expansion, a ton, a ton, even a metric ton of market opportunity that we can - that we are getting very strong indicators on already in our current business. And just like - a lot of potential from additional offerings in the market that we’re seeing and where we’re seeing. So we feel confident. We feel good about it. It's a good target. Our confidence as we approach that target is going to increase over time. I feel confident and we will, of course, update you.

[Phil Winslow:]

And then Elena just to follow-up on that obviously, the CAGR is about 25% over five years data and tripling. When you think about just a margin versus growth framework there versus maybe what you’re all talk about in the past, any changes to that, obviously, 2021 being an investment year?

[Elena Gomez:]

Yes, no I think - first of all, yes, we did have a framework which frankly when you step back and see the world has changed Phil over the last year, it was a good opportunity for us to rethink that framework. And make no mistake, we're investing for growth. And that's our priority. And, of course, it does not mean that over time we will not scale this organization because that's always on our mind. But right now the opportunity is great and we've got momentum in the business. So we want to lean into investing.

[Phil Winslow:]

Great, I'll say my goodbyes in the next quarter, but it’s really been a pleasure working with you.

[Elena Gomez:]

Thanks Phil.

[Mikkel Svane:]

So I'm just going to add one other thing Elena which is more than triple our revenues in five years. So that's a language I'd like to make sure everybody.

[Phil Winslow:]

It’s all right, more than, more than….

[Marc Cabi:]

All right, our next question comes from DJ at Canaccord.

[DJ Hynes:]

So maybe first - and first Elena congrats to you on a stellar five years, maybe the first question I'll point to you just in terms of the 2021 guidance. Can you talk about like what's contemplated in there in terms of recapturing some of that partial churn that we saw as an effect of COVID?

[Elena Gomez:]

Yes sure, I mean I think the, the guidance framework we typically follow hasn't changed that much, but there is one exception, which is now we are coming out of a pandemic. So, we have to put that lens on top of everything we do. So, I would say there's cautious optimism to answer your question specifically. What we've seen from the customers we have turned or contracted, I should say in Q2, you guys remember that was a tough quarter. We've seen about a third of them come back. So, I'm actually optimistic still that we've got some of that to come back into 2021.

[DJ Hynes:]

Yes, okay that's helpful data point. And then Mikkel one for you maybe more strategic I guess - does the increase in messaging as a channel in any way changed the profile of the data that you have access to? Messaging is obviously like a far more persistent channel? I think about all these businesses that are trying to capture experience data right - I think you guys are right at the heart of that. I'm just wondering if there's any implications in terms of how the platform might evolve over time?

[Mikkel Svane:]

There is definitely some dimensions to that because we were going to have a view into a more kind of instantaneous kind of behavior, a more kind of real-time behavior among customers. Like top of our priorities right now is to kind of democratize the access to these tools. We've done that before for e-mail. We've done that before for chat, making it available for everyone and thereby just exploding the demand and the usage of these type of application, and that’s really our priority for messaging, first and foremost.

[Marc Cabi:]

Thanks, DJ. Next question comes from Brad Sills, BofA. Hey, Brad you're muted.

[Brad Sills:]

Yes, I tried to try to enable the video here as well anyway, congrats on a nice quarter. Thanks, guys, for taking the question. A question on Sunshine, I wanted to ask where the focus is there now. What do you hear from customers? I think last year you mentioned during the pandemic a lot of those projects were kind of tabled, understandably? Are customers coming back to these more strategic kind of projects where they're thinking about Sunshine to embed service into the digital fabric of applications? What are you hearing from customers on Sunshine, and where is the focus?

[Mikkel Svane:]

Well, our focus this year is going to be to make it a lot easier for the majority of our customers to use these tools, and like we, still have a big mission. We still have a - we’re seeing some really interesting things. But like short-term for this year, our really focus is to make all of these components, all of these tools incredibly easy to use in NOCO/GOCO environments, and that's our priority for this year.

[Brad Sills:]

Great, thanks Mikkel. And then one more, if I may, just on the global SI channel and the move upmarket? How critical is that channel, and where are you in terms of development of that channel, and where is the focus there as well, please? Thank you so much.

[Mikkel Svane:]

I think as we think about the partner channel, it is an evolution, and we've done some really good things with regional and mid-tier partners to help us quite a bit with both our existing customers as well as bringing in new customers. But there's a lot more to do there over time. There are tradeoffs obviously doing business with Zendesk were easy to implement. But then there's an opportunity to expand your off - expand your use cases over time where partners - can become very helpful. But we think about it as a journey rather than a one year kind of investment return as we think about how we're going to work with partners. But we do have very well-established partner teams now in each of the regions including the U.S., which was kind of our latest market to kind of begin using partners more directly. So, you'll hear more about it over the next year or two.

[Marc Cabi:]

Thanks Brad. All right, our next question comes from Brent over at Piper.

[Hanna Degen:]

This is Hanna on for Brent today. Thank you for taking my questions. First, short-term RPO rose by $67 million sequentially to $627 million. Could you provide some additional color on what drove the strength in the new contract signings this quarter and if it was specific to geography or vertical that stood out?

[Elena Gomez:]

Okay. So, I would say we saw strength all, in all of our segments and regions for the quarter, which were really encouraged by as I mentioned on the script, we definitely saw some new business. And we've been pretty intentional about focusing on making sure we are taking the friction out of doing business with Zendesk like we are trying to make it super simple. And we've seen some payoff in that both in our existing customers, making it easy for them to add agents and to add product, but also as we're acquiring new customers making it easy. So, that's one reason. And then in terms of our RPO broadly, the sales team kudos to them for really thinking about engaging with customer’s longer term that's encouraging for us to see. And so, we're pretty proud about that.

[Hanna Degen:]

Great, that's helpful. And then could you compare and contrast the interesting Sunshine conversations you've seen pre and post COVID? We're noticing more and more customer service engagements are being fielded through social channels and messaging channels. And any color on how channels provide the best customer support have changed and how you're capitalizing on that would be helpful?

[Mikkel Svane:]

Yes, we're definitely seeing a big surge in demand and a big surge in these synchronous and halfway asynchronous messaging channels, like we just released a report on the state of kind of CX during the COVID year here, and there's no doubt that the messaging channels took the brunt of the surge in channels. What we have done with the recent suite release here is that we have tried to take the best of the Sunshine Conversations platform and really made it available for everybody. So everybody can use these channels without any development, and we expect that to be very popular in the market. So that everybody can engage with their customers in a really scalable way, in a really efficient way, and really getting a lot of business insights over WhatsApp, Facebook Messenger, over a line in Japan and all these other channels around the world that are so important for how we engage with each other. But more and more especially now with businesses where we are that are helping us run our lives and run our businesses.

[Marc Cabi:]

Okay. Our next question, Stan from Morgan Stanley.

[Stan Zlotsky:]

Good evening - well afternoon, everybody, Mikkel, Marc, Elena. We’ll definitely - we’ll miss you, Elena. But thank you, guys, for reporting very nice results. A couple questions from my end. Just maybe on Sunshine CRM what are you guys seeing as far as like adoption and momentum as far as monetization of Sunshine CRM as we head into 2021?

[Mikkel Svane:]

Well, just to repeat what I also told before like our focus in 2021 is really to make the Sunshine capabilities available for all of our customers in a low code, no code way. And just like that democratization capabilities that we have. So, normally so good at in the company. And we still see a lot of - like opportunities in a lot of the more advanced use cases. But making a lot of these capabilities more easily available for a larger group of our customers is really on our priority for this year. And will like I think the monetization of the Sunshine platform per se is kind of is, is off a lower priority than getting more usage on the platform, if you will.

[Stan Zlotsky:]

And then just on the, on the pricing packaging, you guys noted in your shareholder letter and also I think it was - came out a few days ago. You kind of tweak around a little bit of packaging and pricing. Maybe just walk us through how you thought about that and what prompted the changes?

[Mikkel Svane:]

So if I start with that, like a lot of it is driven by the behavior we saw on the market last year. Customers they want to be able to hit the ground running. They want some of these things that have always been very, very important to them to Zendesk like the, the ease of use, the instantaneous results like the time to kind of get up and running all these things yet data how you could quickly kind of change your set up, how you don't need a horde of developers to kind of adapt through kind of changing conditions, right? And I think it's one of these things that have really been true for business this year is like change has been the only constant, you know? And so we are trying to make all of these things much easier, trying to make all the decisions around what you need and what you don't need, we’re trying to make - take that - all of that off the table, make pricing and packaging much more transparent and easy. And we believe very much, also based on the initial reaction for this is what businesses want today.

[Stan Zlotsky:]

And then just one very last one for Elena, we’ll rope you in before you skedaddle. Just - if we - when we look at billings, so it looks like billings grew about 30%. And if we look at kind of the changing current RPO plus revenue that was - that growth was a little bit closer to 23%. Was there anything to highlight in - on the billings side? Maybe it was - was there any duration, extension, or maybe the invoicing change wasn't as big as what you initially expected? Just kind of help us close that gap a little bit.

[Elena Gomez:]

Yes. No. I think effectively as we're finding more and more longer-term contracts - and, as you know, that revenue is going to layer in over time. So it's going to show up in our RPO. It won't show up in the current billings, not necessarily. So I think that's the primary difference there.

[Marc Cabi:]

Thanks, Stan. Next up is Jonathan Kees from Summit.

[Jonathan Kees:]

Okay. Let me first start my video. There we go. Okay. I hope you guys see me. So I'll add my kudos to the results and the guidance and also, yeah, the sentiment for you Elena. It's been a pleasure working with you and, yeah, best regards. We will miss you. My questions are I guess for the international revenues. It looks like that's about two and a half year high in terms of the percentage of revenues from outside the U.S. Just curious. I'm assuming that's a direct result of all the senior management that you've backfilled, that you’ve installed, it's like the media and stuff like that. Are you done in terms of the senior management filling in or are you just now growing the sales force for like the media and those other regions? And I have one other question after that.

[Mikkel Svane:]

Well, I want to say that since 2019 we've gone down a path of wanting to be more, be more prescriptive about being a global company and that also means that we want to be more prescriptive about having leadership just outside of our San Francisco office. I'm kidding, little echo here, I'm sorry. That also means we want to have more leadership on the ground in or out in the regions outside of the U.S. And so, far we've been very successful with that. But that also means this is just the beginning of a journey of truly becoming a more global company with more leadership and more executive presence around the world. We are a global company. We have more - half of revenue outside of the U.S. and we are seeing - we're working with some really, really interesting companies both in all of APAC which is a massive region that we always feel we’re just beginning with in Europe and in all of LatAm. So, like we believe that like there’s room for a much more global presence also through more leadership in the regions. Sorry. You’re muted.

[Jonathan Kees:]

Yes one other question if I may here. I know you’re not an ad-driven model-year seats and then new products in terms of monetization. But I guess especially with Sunshine where you collect other - you compose customers, other apps, and you are also - you build user profile. You collect - as a B2C, you collect a lot of data on the consumers. Does iOS 14 have any impact with you guys, or is it more the apps that your customers will be loading on Sunshine?

[Mikkel Svane:]

No, we don't foresee that have any impact to us directly. There is, of course, customers that have to think about how that affects their ad-based business model but not to us.

[Marc Cabi:]

Thanks, Jonathan. All right. Next up is Drew Foster from Citi.

[Drew Foster:]

Thanks for taking the questions. Congrats on the $1 billion mark and to Elena on your new endeavors. I also had a follow-up on the cRPO metric Elena remarked. That - just kind of triangulate the top line indicators here between billings and cRPO growth and so forth. So as it relates to the cRPO metric specifically, I mean, that metric sort of continues to outpace the overall business. And I think I understand sort of the pertinent caveats on that metric in that it doesn't include contracts less than a year and so forth. But given the pace, I'm wondering if there's anything driving that growth rate higher than your actual sort of bookings growth, specifically as it relates to seeing maybe potential benefits from smaller customers just signing on for longer contracts with you but maybe not longer - larger ACV. So I just want to make sure I'm aware of all the pieces as it pertains to using that metric as a leading indicator of revenue growth. Any color would be helpful. Thanks.

[Elena Gomez:]

Yes, I mean, at the highest level Drew it's really tiny. We have been focused on signing multiyear deals. And so, you're not going to see that in the current billions in revenue unless they do annual billing, which we're definitely moving more and more as we can to annual billing. But more importantly, we're getting longer term commitments, which will show up in RPO but may not show up in the current billing cycle or revenue.

[Drew Foster:]

Okay. And then one follow up on guide for next year Elena as it relates to the margin guide and just your spend profile. Wondering if you could put some color around your assumptions that you made for continued savings next year. How much of a benefit maybe that was in that line item and maybe how much you're reinvesting that back in the businesses. Just help us sort of parse that please.

[Elena Gomez:]

I think a lot of my employees would love to travel but the world has changed. And so, we're being I would say conservative with that because we are going to do business in a different way and we're going to have a more virtual first tone to how we operate. That said, we did have roughly I think $15 million of team savings in 2020. Not all of that will come back. I just don't see us doing the same level of travel as we have in the past. And frankly the way we approach our field events our customer events, over time that'll change too. We've had success doing those virtually. We're going to continue some level of that. And of course, there will be some in-person events at the right time. I know our marketing team is working through the new strategy there. But at the highest level, I don't see travel coming back the way it was last year.

[Marc Cabi:]

Thank you. Next up is Jeff, Jeff Van Rhee from Craig-Hallum.

[Jeff Van Rhee:]

So, much here to be proud of you guys, really congrats on everything you're accomplishing. This is a heck of a feat. I have two questions for you. One Mikkel on messaging, it sounds like messaging is exploding. And I'm wondering what the appetite is in your base for automated messaging and bots. Are you still using your own AI to power those responses? And then maybe if I could just sneak my second one right upfront? The second part on power I know in early January you shut down service. And I was wondering if you're setting yourself up for a blowback. And the reason I think that, the Zen policy if you're going to cancel all platforms that service people who rioted and destroyed property and attacked police, I mean that list has gotten very long in this last year and it seems like a very long road for you. And I think - and now I guess if you don't shut these others down, you risk, you risk appearing political agenda driven. So, I guess the question is, you don't want to obviously alienate half your customers and prospects, you see things differently. At the end of the day, I wonder if it's worth the risk and if it's consistent with the goal of maximizing shareholder value? So two, - those two, thoughts on those two would be great.

[Mikkel Svane:]

Yes. So, starting with the latter here. We have a, we have a regards - we have a pretty intense process for evaluating when we get complaints about customers using our service. So, - and I can't say all the details but like we have customers and the customers, and the customer you're talking about here we've had them in review over several iterations based on very specific complaints about what they were doing with their platform. And we really try to, we really try to ensure that nobody uses our product for anything that hurts anyone. And once we get, once we get served with specific evidence for that, we have to have a process that deals with that and figure out what is the right thing to do. So that's how I want to position how we do that. It's this simple and easy? No, it's not. It's simply not. It's not. It's very complicated. But that's also why we have a very well-documented process for how we deal with these things. And as for the first question, with our new messaging capabilities in the product, we have a new tool for all - for kind of the automation of the basic kind of conversation called flow below, which is a little bit like an advanced IVR system, if you will. And that is - that can solve a lot of the basic needs for a lot of our customers. But beyond that, if you can today plug any of the bot providers, and we have a whole bot marketplace and work with these bot providers, to put the kind of the bot set up that works best for you into the stream. So if you feel very good about our strategy today focus on the no automation use cases, the little automation use cases, and the very automated use cases.

[Marc Cabi:]

Thanks, Jeff. Next up we have Samad from Jefferies.

[Samad Samana:]

I'll echo everybody else's sentiments as well, especially, Elena, congrats on the next step and well we'll miss working with you over here. So maybe since I said the nice part I'm going to give an annoying question just to stick with the spirit of everybody else, one less tough question on the way out. When I think about the bookings growth, I like the additional disclosure that we saw in the shareholder letter, and it's been quite nice from the end of 1Q to 4Q, about a 60% increase. But I just want to maybe triangulate how that compares to the prior year, and the reason why I ask that is because whether we use billings or cRPO, that typically goes up by like 40%, 45% from 1Q to 4Q, just back-testing those numbers the last couple of years. So how should we contextualize that 60% increase from 1Q to 4Q of new bookings? And I think the best - easiest way is to just - how should we think about new bookings growth year-over-year in the fourth quarter?

[Elena Gomez:]

So new - so that - I'll agree with you that’s, would you say, an annoying question, but okay. So I think the key is new bookings, if you're talking about Q4 of 2020, we're really proud of the bookings number - bookings growth we had. The one thing you have to remember is, as we give the guide for the year, we have to still remember we are in a pandemic that we don't have all the visibility, but we are confident in our ability to navigate. So if you're trying to compare billings to RPO, again it's just timing. That's - it's really - boils down to that. We've been doing a great job of, and I commend the sales team, of getting longer-term contracts, especially up in the enterprise.

[Samad Samana:]

I guess I kind of was trying to - what I was trying to understand is that bookings chart that was in the shareholder letter, it shows a 60% increase from 1Q to 4Q. I guess what I'm trying to understand is what would the year-over-year increase in the fourth quarter look like for those bookings, both new and expansion?

[Elena Gomez:]

Yes, we don’t comment on…

[Mikkel Svane:]

That was not the intention of this chart. It's not to show that. What it is to show is that after we saw like almost a halt in the beginning of the year, radical slowdown As the pandemic hit us in the head and everybody stood still for a while. Like things have accelerated noticeably truly yet. That is the intention of that job. And you shouldn't try to put a lot of - other data out of it. Does that make sense?

[Samad Samana:]

Yes, great. I totally get it. We have to ask sometimes. And maybe if I step back and ask a more strategic question for you Mikkel. As we think about the slew of new products that came out early last year obviously COVID changed some priorities for your customers and you guys executed well to that. But how should we think about maybe refocusing on sale and you know how should we think about maybe expansion of this suite as we think about outside of maybe just core service as we get back into 2021 and through to next year or later this year, sorry?

[Mikkel Svane:]

So, we've done a lot of work around our sales product last year especially about the ease of adoption and the ease of the purchase and the ease of using it with other systems from Zendesk. And that has worked really, really well. So, we are very excited about that. And that's going to continue to be part of our focus for 2021 as we are working on a roadmap to really get some synergies out of the sales and customer service process. So, we are very confident both about our short and long term opportunity with the sales product.

[Marc Cabi:]

Thank you so much. Next up Kirk from Evercore.

[Kirk Materne:]

Thanks for taking my questions. I guess I'd just like to start maybe on the quarter. Have you guys seen some of the impacted industries come back over the last couple of quarters? I'm just kind of curious you obviously have some great customers in places like airlines. Are they still on sort of demand and their sort of rebounded 2021 or do you start to see them you'll have to look a little bit past the near-term and start making some plans over the - for the next say 12 months or so?

[Mikkel Svane:]

So, if you look at the cohort of customers that contracted in Q2 and there was a large amount of contraction in Q2 if you recall, about 30 - just about a third of that business has returned. So, there's still two-thirds that has potential for us to regain as these customers come back. If you look at airline stats today, they're operating somewhere around 40% on average of capacity of last year, same thing for rideshare companies, for other companies in the hospitality industry. So, those guys are slowly recovering but we have a lot of opportunity as they recover fully post pandemic. And vaccines are here now, so maybe things will change by the summer. What's interesting is despite that, we've been able to grow. We've seen new customer activity at a very healthy rate actually one of the best rates we've ever seen as well as the fact that some of these more traditional companies have been looking for ways to get better at being online first. And so, yes we're really encouraged that we were growing at the rates we were in the second half of the year despite kind of that lag. And that also plays into the kind of the current RPO and all of those other things as those companies and the value of their future revenue are at lower rates that does have a slight drag on current RPO until some of those contracts return into bigger size.

[Kirk Materne:]

And Mikkel just a quick question about in terms of your longer term, tripling, more than tripping of RevPAR over the next five years. What does that incorporate in terms of you're thinking about Zendesk place within the higher end of the market? Meaning there's no doubt that customer service has expanded across every tier of the enterprise but what do you all need to do that - I guess how much do you need to also be successful maybe more upmarket than you have been historically to get to those goals? And how do you feel about your positioning around that?

[Mikkel Svane:]

Yes. Those - like, this is, of course, something that is a question that we've heard for many years and that, of course, we're constantly addressing in the business. How can we continue to become more and more relevant for, like, a large enterprise customers? And that's definitely like a journey we started in five, six years ago like building out the teams, making sure that we had kind of the coverage, making sure that we had a pricing, a legal model and security model, and all of these things that worked for a large enterprise. And we have, of course, succeeded with - like our enterprise proxy has gone up every single year since we started that journey. And we feel confident in our journey towards the largest enterprise. We also know that there's a lot of things that once we get out into various industries that they would like us to work on capabilities and so on. And we have all of those things in our road map. And we feel confident about that we will get there. But as many wise people have advised me, it's a journey. And if we just keep getting added the compounded return of our investment in building the teams, investing in the capabilities, and building the foundation, it will all come. And we feel very confident about that.

[Marc Cabi:]

Next up is Koji from Oppenheimer.

[Koji Ikeda:]

Thanks for taking my questions. Congrats on a great quarter. Sorry to ask another bookings question here. But I did kind of want to talk about or ask about where the strength in the bookings was coming from. And what I mean by that is was that strong bookings performance in the fourth quarter really driven by catch-up from earlier in this year? Or are you really beginning to see or maybe have more strategic conversations with your customers where you're beginning to see some pull forward of future spend coming through in the bookings today? And I have just one follow-up for you.

[Elena Gomez:]

Yes. I can start and then Mikkel or Marc can chime in, but clearly there has been an increase in demand that we're seeing through - and we're seeing it everywhere in our business. You can't really point to one segment, one - which is, for us, a good time, right? That tells me it's a broad-based demand for our products as opposed to execution in any one part of our business. So it's really coming from both new customers, from our existing customers expanding, from all of our segments, and frankly all of our regions. Mikkel, if you want to pick up on that.

[Mikkel Svane:]

No. We alluded to it in our shareholder letter, too, that we are seeing a lot of customers really pivoting for this new economy, for this new reality, for this online-first model that we are living in right now, and we’re definitely seeing growth from that segment, like we definitely still have segment of customers that are suffering. And then we have a lot of new businesses and a lot of new activity, and a lot of also customers that are just killing it in this economy, and like - so it's a combination of all of those things.

[Koji Ikeda:]

Thank you. And for my follow-up, I wanted to ask you a question on the Unity partnership. I saw it come through on the press release. I think it was in December. Had to ask a question, being a pretty avid gamer in the past. Reading that, I got excited. I'm like, wow, in-game support. I wish I had that back in the days. So my question is really trying to size up the opportunity, maybe from a TAM perspective. What could this mean for maybe new customers that you maybe wouldn't have been able to talk to in the past or messaging transactions or that potential over the next several years. And maybe you could talk a little bit about how that, that partnership conversation started with Unity. Thank you for taking my question.

[Mikkel Svane:]

Yes. No worries. I really enjoy that question like gaming is such an interesting industry. And like - we - I think we are all incredibly inspired of what you’re seeing in the gaming industry, in the community in the way of engaging and communicating and just building very strong communities along these games. So, we are very excited about this. We've been working across with Unity and we know these guys of course in the good old days in Denmark etcetera. But like what we've done now is really, really making it easy for game developers to put these capabilities into the products. So, we are of course working with a long number of game, game providers around these capabilities and now getting all the feedback to like new and cool stuff we can do and like I’m just very excited about that journey. We've always been big with gaming but I would definitely hope to take that to the next level. And I just want to thank all the gaming providers out there for helping us through this pandemic here. Like my kids are so, so grateful and I also just want to - to our friends at Roblox, I love you guys. This has been like on behalf of all my kids, thank you and me.

[Marc Cabi:]

Thanks, Koji. Let's see, who's - now Tom Roderick up next, Stifel.

[Parker Lane:]

It's actually Parker Lane on for Tom. So, Mikkel you just talked about making Sunshine easier in 2021 and that being one of the big priorities for the company. Can you talk about the role that partners can have in doing that? And is it more about the development of new use cases, is it configuration work? What exactly are the elements that you need to improve to make that more useful for customers?

[Mikkel Svane:]

Well, I think that, I think that like our thought as a company has always been the democratization of those things that everybody can kind of figure out using it. Even like our ad framework that you can use today to integrate applications - custom application, banner applications into your workflow. It’s something where we really made an effort just to make that as easy and painless so that you don't have to be a developer to do these things. And that's a little bit the same effort we're doing here. We can see like how making these things easier to use. So like using no-code and no-code tools just accelerate the adoption. And, of course, our partner play a big role in this. They do - especially with the more advanced use cases. And like just ad frameworks, so they have like more than 1,000 apps - custom apps that other companies have built to provide the capabilities of various scopes. And that is what we are trying to do here to really make it easy for the whole partner ecosystem, the whole partner network to help customers with these things so they can extend, integrate, and customize, and get further out into all the different places where customers meet businesses today.

[Parker Lane:]

And then, Elena, you guys highlighted a lot of the contraction in those sort of elements that were playing into the model throughout 2020. But as we think about the cohort of customers that Mikkel just mentioned that are sort of killing it or actually benefiting from the pandemic, what happens to them sort of as we reenter this open world again? Are they going to have a meaningful step-down? Are they going to have the use cases emerge to keep their demand level sort of where they were? Just help me walk through some of the puts and takes with that cohort.

[Elena Gomez:]

Yes, I think - so you can't look at one unique cohort because they - think of it as a portfolio of customers. Some will continue to have new use cases that evolve because of the pandemic. We're seeing a lot of that. Some will come back to their normal rate. And then some of the ones that contracted like Marc talked about earlier, we have yet to see them come back. So that’s part of the reason why we - when we approach our guidance and everything, we do it cautiously because there's still a lot of unknown. But we're optimistic that some of the trends we're seeing are durable trends. These are things that will not change and will not go back to what we saw before.

[Marc Cabi:]

Thanks, Parker. Next up is Pat Walravens, JMP.

[Patrick Walravens:]

So, Elena, two for you. First up, is there anything you can share with us about your future plans and why now? And then, secondly, and this one will be more fun, what are the characteristics that you think Zendesk should look for in your successor?

[Elena Gomez:]

You should ask my boss that so why now? I mean, it's a personal family decision, really to be honest. I've been here five years, and 2020 gave me the opportunity to sort of reflect on a lot of things and so personal - just a personal choice. I love Zendesk. I should have a tattoo of Zendesk somewhere on my wrist here. It's a great management team, and I couldn't be more proud of where the company is, actually. So, as far as my successor, I feel I'm leaving the company in great shape for this person. That's what I would say.

[Patrick Walravens:]

Yes.

[Elena Gomez:]

And someone as cool as me, I don't know if Mikkel will find that or not. We’ll see.

[Patrick Walravens:]

All right and Mikkel, if I can to your follow-up because I know as an organization this is something where we're having a hard time figuring out. What is your policy going to be for back-to-work? Because I really don't think virtual for everyone is the right solution, particularly not for your younger people you're trying to develop. So where are you guys on that?

[Mikkel Svane:]

Right now, we’ve told the team that nobody should expect to be back in the offices for real until like September of this year. We do have a few offices around the world where we start kind of pilots in getting teams back in with all kinds of restrictions and regulations to kind of minimize any risk we see. We - like we know already that a lot of our employees are really embracing the freedom and the opportunity that comes with not having to commute into the office every day. And we expect up to half of the team is not going to be in office workers going forward. But of course, we still need to do a lot of things together. We still need to get together and have a cocktail from time-to-time like we used to do. And we also need to celebrate and we need to get together some time and look at each other in the eyes and learn things about each other. And we need to do a lot of like white boarding and so some of these things. So, we will always - we will need to have these facilities to kind of collaborating like that. Then we also have of course situations where like working from home may not work always for everybody and/or like may not work in periods for everybody. So, we definitely also need office space for our people that don't have that luxury or don't really don't - can't function in that set up too. So, it's going to be a combination. But I think what really matters here is less above how - the actual office space configuration going to be and how many come back. It is that this - how we communicate today and I can see your pad and I'm pretty sure you're sitting in your underwear. But like - as I am. But like this way of engaging, this way of communicating and this way of collaborating is going to be the dominant way for - regardless of where you sit in that office or elsewhere. And I think this is going to - with this, we can really do some amazing things. And like we have to be really, really good at this and this is what we are telling our employees. But that little square you're sitting in today like dominate that, live that, embrace that because this is by being the best at this we can get, we can - unlock some future potential. Does that makes sense Pat?

[Patrick Walravens:]

Yes, I think it's, I think it's tricky. I don't love the idea of the little square going on forever honestly.

[Mikkel Svane:]

Is that why you don't have your camera on?

[Patrick Walravens:]

No I'm trying to turn it on, your host has stopped it.

[Marc Cabi:]

Oh, oh all right. We got…

[Patrick Walravens:]

All right.

[Marc Cabi:]

We got four more and more people - there he is. All right we have four more people and only eight minutes. Let me ask each to just do one. Sorry guys. Sorry we're not managing time as well as usual here. Ken you’re up.

[Ken Wong:]

Okay, great. I guess I’ll stir my question towards the latter then. So billings question, I know you guys don't typically talk about next year but this year is a bit of a weird year from billings growth and next year will be a weird year from a billing comp perspective? How should we think about what that growth rate could look like relative to the revenue growth numbers you guys put out there of 26%. Does that kind of generally track and then thoughts on seasonality would be great as well?

[Marc Cabi:]

Okay, Ken I’m going to step in real quickly, we don’t want to guide for billings. But remember that in Q1 we did sized the billings impact last year of about just over $25 million from that change in invoice cadence. So, think about we missed just over $25 million in billings last year. So, as we go into 2021 we will invoice for 12 months whereas last year we only invoice for 11. So, I don't really want to ever guide to billings because of the way kind of - we have a large number of monthly customers so sorry to step in for you, Elena, on that one.

[Elena Gomez:]

Thank you. Love it.

[Marc Cabi:]

Next up is Derrick from Cowen.

[Derrick Wood:]

Great, thanks for taking my question. So you guys have a new metric, percentage of ARR generated from $100,000 contracts. And when you showed that chart in the shareholder letter, it shows a steeper curve than the old metric and in terms of upwards to the right. And I think what that tells us is stronger enterprise traction than the old metric. And so first, can you share anything around large deal wins in Q4 and kind of what sectors maybe you're seeing greater strength in the enterprise? And then help us understand some of the key catalysts that are helping you drive traction up-market. I mean, I think of just pure sales execution. I think of maybe maturity in Sunshine. I think of acceleration of digital initiatives. How are some of those factors playing into the success you have in that market?

[Mikkel Svane:]

Derrick, first and foremost, and allow me to butt in here, Marc. Yes to the last questions, all of the above, like these are all vectors that drive our further penetration into market, alongside the fact that, like, also enterprises are starting to look for much more agility in their business solutions, like nobody can do a nine-month project today or even - like think about this year. Nobody could do like a six-month project. Forget about it. That's not how the world operates anymore. So like really like - speed, agility, it’s like - it's a real currency today. So, with that, the other thing, this is not a new metric. As we say in the letter, this is an illustration of some of the issues we have with our old metric or with our current metric in that it only measures the percentage of our revenue from the one very specific product and the one very - the specific seeds of that. And that is why we want to show that that over time that metric has become less and less precise for - as a proxy for enterprise progress. And that's why we want to show this other metric for comparison as we figure out what is a proper way of relating this in the future. Does that makes sense?

[Derrick Wood:]

Yes, yes well, it looks good.

[Mikkel Svane:]

Yes.

[Marc Cabi:]

Thanks, Derrick. I’ll just close that we are continuously - one of our imperatives are to move up market. So hopefully that's representative of that. So that's kind of why I was placed there. We're going to move on because I have four minutes left here. Chris Merwin, Goldman.

[Christopher Merwin:]

Congrats you all on the quarter. So just a quick one from me, I was just wondering if you can help us think through some of the ACV uplift you're getting from Sunshine. I know - I think in the Analyst Day around a year ago you sort of gave an illustrative example. Just curious anything you can share with us on benefit to deal size as your stand from that? Thanks.

[Mikkel Svane:]

First and foremost, our priority in 2021 is really to make the Sunshine capabilities much more available that will grow the partner ecosystem, that will grow the adoption and the acceleration of the usage of the product. And that is our key priority over any monetization of the platform. And that's how we think about. That have always been the centers D&A and that's how we think about Sunshine.

[Marc Cabi:]

Thanks, Chris. And we'll close off with Arjun from William Blair.

[Arjun Bhatia:]

Thanks for taking the question. A quick one from me on the up-market traction and large deal flow, it seems like the 2020 conversation was a little bit more focused on quicker time to value deals at the expense of maybe some of these larger transformational projects? Just give us a sense for what you saw in Q4 and what the pipeline for those deals looks like going into 2021?

[Mikkel Svane:]

I just want to say that high level, we see speed and agility as an increasingly important factor of the transformational projects to. Like we this year, we have seen large projects that we participated in with incredibly quick turnarounds. And that's something we hope to speak more about that’s something we hope to help other companies learn from. And it's something we expect to see a lot more from.

[Arjun Bhatia:]

Okay, got it. Thank you and congrats on the quarter.

[Mikkel Svane:]

Thank you.

[Marc Cabi:]

Thanks, Arjun. With that, we are out of time. I appreciate everybody's interest in Zendesk and we will see you again next quarter. Have a great afternoon. Take care.